Can HK equity market live without capital inflows from China?

It would seem that Hong Kong stocks are becoming ever more dependent on capital flows from mainland China when it comes to the factors shaping the market’s performance.

In the US, the Dow Jones Industrial Average slid nearly 1,200 points on Monday. After that, the Hang Seng Index plunged over 5 percent when trading began in Hong Kong the next day. But thanks to bargain-hunting money from across the border, the index came off its worst levels.

Southbound trading hit a record high of HK$43.8 billion that day, accounting for 16.9 percent of the total market turnover of HK$258.8 billion

The capital flow from China comes from two channels– Hong Kong-Shanghai Stock Connect and the Hong Kong-Shenzhen Stock Connect.

Typically, mainland investors from the former channel prefer to invest in bluechips like China Construction Bank (00939.HK), Tencent (00700.HK) and HSBC (00005.HK).

By contrast, the money from the latter focuses largely on smaller stocks, such as Genscript Biotech (01548.HK), Future Land Development (01030.HK), and Yanzhou Coal Mining (01171.HK).

The Hong Kong-Shanghai Stock Connect was launched in November 2014. Given the program has set a minimum threshold at 500,000 Chinese yuan to open an account, these investors are wealthier and usually more experienced

By contrast, investors using Hong Kong-Shenzhen Stock Connect are mostly young and new investors.

Investors from Hong Kong-Shanghai Stock Connect are more seasoned, and they usually go against the crowd. For example, they might hunt for bargains during market corrections.

Meanwhile, mainland investors from Hong Kong-Shenzhen Stock Connect largely follow the momentum, and they tend to be more speculative.

Generally speaking, the southbound flow from the Hong Kong-Shanghai Stock Connect can be viewed as “smart money” and these investors look for long-term gains.

On the other hand, investing activities of mainland investors under the Hong Kong-Shenzhen Stock Connect can provide some hints for the kind of stocks currently in favor and ideas for short-term trading opportunities.

However, the southbound trading reported first net capital outflow on Wednesday, which dragged the Hang Seng Index lower at the close.

Right now, there are growing worries as to how the Hong Kong market will fare during the upcoming Lunar New Year holiday, when mainlanders will be on extended break, affecting southbound investment flows.

The channel would be closed for the Chinese New Year holiday between February 13 and February 21. That means Hong Kong market will be cut off from mainland capital inflow for a few days.

If there is another round of global sell-off during this period, the Hong Kong market is unlikely to be as resilient as last time.

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